Thursday, February 18, 2010

Government intervention....from where I sit....

This week we once again saw the government propose changes to mortgage insurance regulation that will go into effect on April 19th 2010. For anyone who hasn’t seen what the changes will be, here they are in a nutshell:

• All borrowers must meet the standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate or a shorter term. This will help Canadians prepare for higher interest rates in the future.
• Lower the maximum amount Canadians can withdraw when refinancing their mortgages to 90% from 95% of the value of their homes. This will help ensure home ownership is a more effective way to save.
• Require a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

Normally I’m not a big supporter of excess regulation by the government but with this one I’ve got mixed feelings. The government is basically trying to protect consumers and lenders from ourselves. It’s hard not to look south of the border and see why Jim Flaherty would want to impose such measures and protect our economy from what happened in the US. With the changes above, borrowers are forced to qualify at a rate that ensures they will still be able to afford their payments should rates rise and they’re also forced to maintain an equity level of at least 10%, which will a) provide an equity buffer should real estate values fall and hopefully prevent homeowners from getting into a negative equity position and b) help Canadians with their “savings”.

I’m all for bolstering the economy and preventing potential disasters down the road. It’s good to have a little foresight, learn from experience and make positive changes. What I have a problem with is the scope of that foresight and the changes they decided to implement. The scope is very narrow and doesn’t take into account all the elements that make up homeowners’ debt. I’ve made mention of this in the past but what about the predatory practices of credit card companies that keep sending notices that they’ve increased your limit until before you know it you have a $30,000 visa limit with an 18% interest rate. Or retail cards that are able to charge 30%?! How many people that were lined up for hours and hours on boxing day at electronics stores bought their computers and big screen TVs on their retail cards and are now paying 30% to finance those purchases? Shouldn’t the government be looking at regulating some of those practices to protect Canadians? Right, the Government effectively controls mortgage insurance in Canada so it’s a much easier change to implement rather than going after big business to pull back the reins.

I see first-hand the amount of people who use their homes as an ATM. As the values go up, they’re constantly removing equity to pay for other things or pay off the debts they’ve accumulated outside their mortgages. Unfortunately, limiting them to how much equity they’re going to remove from their homes isn’t necessarily going to help them. In a lot of cases it will actually hurt them. It means they will likely end up carrying more high interest debt than if they were able to refinance. In my opinion, forcing all possible lenders (mortgage, credit card, retail, etc.) to have more customer-friendly practices would be a much better long-term solution.

The glaring piece I see missing from the Government changes is education. I see the proposed changes like a parent trying to protect their kids by constantly saying “you can’t do this, you can’t do that” without actually explaining why. As a parent I always do my best to explain to my kids why they can or can’t do something so they can learn. They need to understand why and what they’re being protected from so at some point they can protect themselves. If I constantly say “no, no, no” without explaining myself, they’ll never be able to make their own decisions and good ones at that. I’ve said this for years that there is a huge gap surrounding personal finances in our educational system. Kids aren’t being taught how to manage finances. Like so many other things it seems the system leaves that to parents to teach their kids and if anyone has read my previous posts you know where I stand regarding learning about finances from your parents. I know that the Ontario Government has recently expressed that they will be including personal finances in grade-school curriculums in the coming years and I think it can’t be soon enough.

All in all I think the changes are likely a good thing but are only part of the puzzle. If the Government broadens the scope of their efforts, they will have a much greater impact down the road.

If anybody has similar or differing opinions, I’d love to hear them.....


Tuesday, February 9, 2010

Variable or Fixed...what is the best option?

This is a question I hear A LOT. The answer is that there's no one-size-fits all solution — the ideal mortgage depends largely on your individual circumstances and risk tolerance.

A recent study found that 88 per cent of Canadian mortgage holders saved money by sticking with a variable rate over the past 10 years. But 68 per cent of Canadian homeowners have fixed-rate mortgages. Does this make sense to you because it sure doesn’t make sense to me. If there is historical data that proves one option performs better than the other, isn’t the choice logical?

I believe the biggest reason why the greater percentage of consumers have fixed rate mortgages, is conditioning. We’ve been conditioned by our parents to be conservative with our finances, especially mortgages and we’ve been conditioned by the banks to always look first at fixed rates.

I’ll start with parental conditioning, which has two elements. The first is that by and large, our parents (those that are 60+) were very conservative with their finances and that, if anything, is what they taught us. Now, it’s not their “fault” because that’s what was taught to them by their parents. These are people that lived through World Wars and the Depression, how could they not be conservative and how could that not trickle through the generations? My parents only ever had one mortgage (with a bank) and it was a 30-year mortgage. So, with all that experience, what sort of wisdom do you think they would have to impart on my first step into purchasing a home...go to the bank, the second element in parental conditioning that leads nicely into how consumers are conditioned by the banks.

Hopefully the way I refer to banks in this blog doesn’t lead people to believe I think banks are completely evil and that everyone that works for them are incompetent. On the contrary, I know a lot of people who work at banks and are very good at what they do. When I speak of banks, I’m talking in general and about the truths that I believe make up most of their practices. Having said that, go into a bank and ask them what their mortgage rates are and I’m willing to bet that a very high percentage of the time the first rate they will tell you is their 5-year fixed rate. Why? Is it because that’s the term and option they profit the most on, is it because it’s considered long-term and they know they have you stuck with them for 5 years or is it because that’s just the rate most people ask for so it’s the one they generally lead with? I believe it’s a combination of a lot of things. You can sort of see how it could just be a vicious cycle...we’re conditioned to go to the banks and they’re conditioned to lead with the 5-yr rate. Reality is the banks are in business to make money so they’re going to try to profit from you however they can, whether it’s through selling you their most profitable product or gouging you with high rates. My biased opinion is a mortgage agent is always a better option. We don’t profit from you, we’re paid by the institution we place your business with. Our role is to find you the best product at the best rate. My goal is a satisfied client, who I hope will come to me when it’s time to negotiate their renewal and refer me to the people they know. The banks don’t typically care if you threaten to leave them because they know that at the very same time, someone is threatening to leave the bank next door and will walk right in through their doors. I get that banks for some reason make people more comfortable and that’s fine, all I’m saying is if you choose the bank route, make sure they present you with ALL of the options and not just the 5-yr fixed rate.

On to the question of variable or fixed. Typically when I’m asked the question my answer is that it’s a matter of personal preference and tolerance. Then the follow-up question is what do I have. I usually hesitate to answer that question in fear it be perceived as advice. My role as a mortgage agent is to present all of the options, pros and cons and let clients make the decision that’s best for them. What I think is best for me and my family might not be best for you and yours. What I usually tell people is that it comes down to what will help you sleep at night. If you’re going to be completely stressed with a variable rate mortgage and will stay up worrying about it, then it’s not for you. If you feel easier with the idea of knowing what your payments are going to be for the next 5 years even though you MAY pay more in interest over that term than if you took a variable mortgage, then that’s the best option for you. A comparison I like to draw is with your investment portfolio. Is your portfolio mostly comprised of GICs, Canada Savings Bonds (like my parents advised me to invest in) or low-risk mutual funds? Then more than likely a fixed rate mortgage would be best for you. Do you hold mostly higher risk equity mutual funds or stocks? Then more than likely your risk tolerance would mean you can handle a variable mortgage.

The answer to the question of what I have is variable. It’s what works best for me and my family. Obviously I like the fact that variable rates are much lower than fixed rates at this time. Currently a 3-yr variable is as low as 1.85% whereas a 5-yr fixed is at 3.64%, which is still a fantastic rate. One of the things I prefer about variable rate mortgages is the flexibility. If for whatever reason I decide variable is not for me, I’d be able to lock into a fixed rate with no penalties. If I decide to refinance in order to consolidate debt, remove equity for renos or just take advantage of a lower rate relative to Prime, the penalty to do so, is a fraction of what the penalties are to break a fixed-rate penalty. Here’s an example, I recently had two clients looking to refinance, one had a fixed rate mortgage and the other had a variable rate mortgage. For the fixed rate client, the new mortgage rate would be almost 2% lower than what they were currently paying but with a $10,000+ penalty to break the mortgage, it didn’t make sense to do it. On the other hand, the variable rate client was paying Prime + 0.60% (2.85%) and by breaking their mortgage in favour of paying the going rate of Prime – 0.40 (1.85%), although they had to pay a $2500 penalty to do so, they stand to save $8500+ over the next three years.

If you want to talk about your own situation and what works best for you, I’d be more than happy to show you all of your options.

Wednesday, February 3, 2010

Mortgage Renewals – BEWARE OF BEING GOUGED!!!

Did you know that 84% of all maturing mortgages are renewed with the same lender? 84%!! I find that staggering. Why, you ask? Well, did you also know that at least in the case of the banks, the renewal notices that get sent to you as your mortgage is maturing do not quote their best rates? shouldn’t be.

Why would people renew at a rate that’s not the best available? It’s just like when you walked into the bank to get your first mortgage and the quote you were given was not the best rate. It likely required you to negotiate like crazy to get a rate that still wasn’t the best available. I know, I know, it’s just so easy to sign the renewal notice and send it back and that’s it. Let me draw a comparison. Take a professional athlete who is coming to end of his contract and will be a free agent. Does he simply sign on the dotted line at the end of his contract for whatever the team is offering? Absolutely not!! He tests the free agent market and entertains offers from the open market to find out who the highest bidder will be so he can make as much money as possible. More importantly, he gets an agent to do it for him. The same goes for the world of maturing mortgages. There is a very competitive lender market out there that desperately wants your business and is willing to fight for it. Consumers should be taking advantage of their free agency and that open market to get themselves the best deal possible and save money. And just like in the sporting example, there are agents who are willing to do the shopping for you to get you the best deal. The difference is our services are free to our clients whereas a sports agent charges a hefty fee to their clients.

If you have a mortgage coming to the end of its term in the upcoming months, give me a call so I can ensure that you’re getting the best deal possible. Just don’t need to do any shopping, negotiating or accommodating the bank’s hours. I’m one phone call away, will do the shopping for you and come to you whenever it fits into your schedule.

Here are just a few of the rates I have available to me right now:

3 Yr Variable = 1.85%
5 Yr Variable = 2.00%
5 Yr Fixed = 3.74%

At the very least, keep yourself informed so you have as much leverage as possible if you decide to take on the challenge of negotiating with your bank.